Three Spanish savings banks, Ibercaja, Liberbank and Caja3, are considering a merger to strengthen their balance sheets

Three Spanish savings banks, Ibercaja, Liberbank and Caja3, are considering a merger to strengthen their balance sheets as the country's debt crisis continues to bite. The banks said their boards would meet on Tuesday to vote on the merger. The difference between German and Spanish bond yields also hit a new high, as investors lose faith in the Spanish economy and flee to safety. German 10-year bond yields fell to 1.347% while Spain's rose to 6.5%. Spanish shares were also lower, with Madrid's main IBEX share index down 1.7% in afternoon trading despite other European indexes rising. Investors are worried about the amount of bad loans Spanish banks could be holding and how the government can afford to keep bailing out the struggling financial sector. The Bank of Spain has predicted that the recession will continue in the second quarter of 2012.  "Available indicators for the second quarter are still scarce but they do anticipate that activity will continue contracting in this period," the central bank said. Regional loans There was more pressure on Spanish debt from the news that the government plans to approve a scheme on Friday that would allow its 17 regions to borrow money using joint government-back bonds. The so-called hispanobonos are designed to make it cheaper for the regions to borrow. "The goal is to reduce the pressure on the regions, which is often greater than the pressure on the state in general, with some regions not able to borrow on the market," an economy ministry spokeswoman said. One of the regions, Catalonia, appealed for central government help last Friday. Austerity squeeze The difficult state of the country's finances was underlined by the latest retail sales figures, also released on Tuesday by the National Statistics Institute. Spanish retail sales dived in April, showing the biggest fall since the figures started being collected in 2003. Continue reading the main story Crisis jargon buster Use the dropdown for easy-to-understand explanations of key financial terms: Yield Yield The return to an investor from buying a bond implied by the bond's current market price. It also indicates the current cost of borrowing in the market for the bond issuer. As a bond's market price falls, its yield goes up, and vice versa. Yields can increase for a number of reasons. Yields for all bonds in a particular currency will rise if markets think that the central bank in that currency will raise short-term interest rates due to stronger growth or higher inflation. Yields for a particular borrower's bonds will rise if markets think there is a greater risk that the borrower will default. Glossary in full Sales fell 9.8% last month compared with the same month last year, after adjusting for calendar differences. The fall was much worse than had been expected, and marked the 22nd consecutive month of declining sales. Sales had fallen by 3.8% in March. Without adjusting for calendar effects, retail sales fell 11.3% in April having dropped 4% in March. Spanish shoppers are struggling because of government austerity measures, rising taxes and Europe's highest rate of unemployment. Employment in the retail sector was down 1.2% in April from the same month in 2011. Overall, the unemployment rate in Spain is more than 24%, while the economy is back in recession having contracted in the last three months of 2011 and the first three months of 2012. Bad debts The Spanish government is requiring its banks to set aside an extra 30bn euros to cover bad debts resulting from the collapse of its property sector. This comes on top of the 53.8bn euros already allocated in February. The Spanish property crash has forced a wave of mergers upon the Spanish banking sector as it seeks to shore itself up against the bad debt mountain. Caja3 is the result of a three-way merger of regional savings banks. Liberbank emerged after a four-way merger. And Bankia, the debt-stricken part-nationalised bank that has requested a 19bn euro bail-out from the government, was formed after seven banks merged. Another bank, Banco Popular, announced on Tuesday that it was in talks to sell its online banking business in an effort to raise cash. Its debt has been downgraded to junk-bond status. Prime Minister Mariano Rajoy admitted on Monday that the country was struggling to borrow money, but insisted that his country would not need to ask for a bail-out from the EU.

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